The European debt crisis seems to be having multiple and ripple effects on industry majors.
Take the case of France Telecom (NYSE: FTE). The company, which holds fourth place in Europe's telecom industry by way of revenues, is selling off its Orange Switzerland subsidiary for a deal reported to be around $2.1 billion. The buyer is London buyout firm Apax Partners.
This should be a good move for France Telecom for two reasons. One, European operations have tended to be slow in recent times and so the company needs to shed some undesired weight. In fact, France Telecom is planning to make an exit from its Belgian and Austrian operations as well.
From a macro standpoint, Europe is not a very lucrative market to operate in right now, given that mobile penetration there has reached a saturation point, regulations are tight, and new customers are hard to find in cash-strapped countries. Moreover, the company now wants to consolidate itself in growing markets such as Africa and the Middle East, which together posted strong 6.1% third-quarter revenue growth, as compared to a 2.8% fall in revenue in France, its core market.
The other goal of the sale is to boost investor confidence, which France Telecom is trying to ensure by promising to return almost half the amount raised to shareholders through a process of stock buybacks. With shares down around 24% over the past year, this move should go down well with nervous investors.
Apart from the attempt to protect dividends, France Telecom also badly needs the other half of the cash, as it faces upcoming technology upgrade costs, coupled with spectrum requirements. In fact, the company is bidding to grab a portion of 4G mobile services spectrum in a French government auction.
France Telecom is not the only telecom company in a tight spot. Others such as Telefonica SA are faring no better, as the latter cut down on its dividends for the first time in 10 years. Compare this to Vodafone and Frontier Communications, which continue to pay big yields to investors.
France Telecom is doing all it can to find a way out of the European morass while keeping its investors happy. To stay updated on the latest developments about France Telecom, just add it to your watchlist. It's free.
